8.2 International Trade

Question 1

Reasons for expansion of international business

Raw,new,trade,low,exploit,transport

Answer 1

• Securing a new source of raw materials
• Expanding into new markets
• lower costs of production
• Avoiding trade restrictions
• Exploit monopoly advantage over Host country
• Avoid transportation costs
• Avoid national purchasing policies

Question 2

2 Ways to do Foreign Investment

Answer 2

1. Buy Stock in a foreign Company
2. Direct Foreign Investment
   (buying equipment and buildings for a new company

Question 3

Advantages of a direct foreign investment include

Answer 3

• Lower taxes in the foreign nation
• Annual depreciation allowances for the amount invested
• Access to foreign capital sources
• Avoiding trade restrictions imposed on foreign companies in the customers’ market

Question 4

Cost of capital for foreign projects is higher because

Answer 4

• Exchange-rate risk and the purchasing power parity.
• Sovereignty (or political) risk from possible expropriation (or other restrictions), with net losses to the parent company. Rebellions could result in destruction of assets, and governments may impose foreign exchange controls that limit the repatriation of profits.
• The likelihood of laws requiring financing from certain sources, such as a requirement that foreign subsidiaries must be at least 51% owned by locals.

Question 5

American Depository Receipts (ADRs)

Answer 5

Foreign stocks are deposited with a large U.S. bank, which in turn issues ADRs representing ownership in the foreign shares.

ADR shares then trade on a U.S. stock exchange, whereas the company’s original shares trade in foreign stock markets

ADRs allow Americans to invest abroad and foreigners to raise capital in the U.S.

Question 6

Multinational Corporations
Benefits to the Home country

Answer 6

• knowledge, resources, balance of payments,Earnings
• Improved earnings and exports of products to foreign subsidiaries
• Improved ability to obtain scarce resources
• Favorable balance of payments from royalties, dividends and profit payments
• use of knowledge gained from foreign operations
• The typical benefits of free trade, i.e., greater product availability, a better international monetary system, and improved international understanding

Question 7

Multinational Corporations
Adverse effects on the home country

In my Home,
Loss of jobs, taxes is Political. Loss Exports Neg BOP, Competitive

Answer 7

• Loss of jobs and tax revenues
• Instability caused by reduced flexibility of operation in a foreign political system and the risk of expropriation
• Competitive advantage of multinationals over domestic rivals
• Negative effect of on balance of payments from loss of exports

Question 8

Multinational Corporations
Benefits to the HOST country

A good host provides new investment, increased output and efficiency BOP, competition , taxes, Standard of living

Answer 8

• New investment of capital, technology, and management abilities
• Improvements in output and efficiency along with the resulting stronger balance of payments
• Stimulation of competition, increased tax revenues, and higher standard of living

Question 9

Multinational Corporations
Adverse effects on the host country

Royal,Transfer,Cartel, Tech

Answer 9

• Remittance of royalties, dividends, and profits that can result in a net capital outflow
• Setting of transfer prices among subsidiaries so that profits will be earned where taxes are lowest or restrictions on the export of profits are least stringent
• Multinationals engaging in anticompetitive activities, such as the formation of cartels

Labor saving technology may not be in the best interest of a labor abundant country

Question 10

Cross-Border Factoring

Answer 10

• factor purchases receivables and assumes the risk of collection
• method of consummating a transaction by a network of factors across borders

Question 11

Methods of Financing International Trade

Cross-Border Factoring

Answer 11

• factor purchases receivables and assumes the risk of collection
• method of consummating a transaction by a network of factors across borders

Question 12

Methods of Financing International Trade

Letters of Credit

Answer 12

Issuer (usually a bank)

• Importer gets a letter of credit
• Bank verifies that Exporter has performed (BOL)
• Releases Funds
• Importer pays Bank

Question 13

Methods of Financing International Trade

Banker’s Acceptances

Answer 13

• time drafts drawn on deposits in a bank
• short-term credit investments created by a nonfinancial firm with payment guaranteed (accepted) by a bank.
• These are essentially commercial drafts
• draft contains an order by the drawer to the drawee to pay a fixed sum of money to the payee
• traded at discounts in secondary markets.

Question 14

Methods of Financing International Trade

Forfaiting

Answer 14

• form of factoring
• sale by exporters of large, medium- to long-term receivables to buyers (forfaiters) who are willing and able to bear the costs and risks of credit and collections.

Question 15

Methods of Financing International Trade

Countertrade

Answer 15

• barter, the exchange of goods or services for other goods or services rather than merely for cash.

Question 16

Methods of Financing International Trade

Sight Draft or Bill of Exchange

Answer 16

• exporter holds title to the shipped goods until the importer has received the shipment and paid for it.
• sight draft and shipping documents are sent to the importer’s bank, which remits payment to the exporter

Question 17

Methods of Financing International Trade

Open Account Sale

Answer 17

risky because the exporter merely ships the goods to the importer

not assured of payment if the importer defaults

Question 18

Methods of Financing International Trade

Prepayment

Answer 18

exporter will not ship the goods until the buyer has wired payment into the exporter’s bank account. First-time buyers of unknown creditworthiness and buyers in financially troubled countries are often required to prepay

Question 19

International Tax Considerations

US and worldwide -4

Answer 19

1. To avoid double taxation, two or more countries may adopt treaties to coordinate or synchronize the effects of their taxing statutes
2. Most countries tax only the income sourced to that country
3. U.S. taxes worldwide income (from whatever source derived) of a domestic corporation. Double taxation is avoided by allowing a credit for income tax paid to foreign countries or by treaty provisions
4. In the case of foreign corporations, the U.S. taxes only income sourced to the U.S. Ordinarily, such income is effectively connected with engaging in a trade or business of the U.S. Certain U.S. source income, e.g., gain on the sale of most stock, is not taxed by the U.S.

Question 20

International Tax Considerations

Transfer pricing - 3

Answer 20

tax calculation for multinational corporations that transfer inventories between branches in different countries

1. U.S. tax laws have limits on the amount of profit that can be transferred from a U.S. parent to a foreign subsidiary or branch.
2. Thus, transfer prices charged to foreign subsidiaries may differ substantially from those charged to domestic subsidiaries.
3. The existence of tariffs in the foreign country may necessitate a lower transfer price to reduce a tariff based on the inventory value.